Transparency in Corporate Governance
Many recent corporate governance scandals have caused government to implement a number or regulatory modifications. One factor in relation to these changes is improved disclosure requirements. An example, Sarbanes-Oxley (SOX), created because of Enron, WorldCom, and additional public governance malfunctions, with detailed reporting of off-balance sheet financing and extraordinary use entities. Furthermore, SOX amplified the punishment to executives for misrepresenting.
The association between governance and transparency is clear in the community’s discernment; transparency was amplified for the purpose of improving governance. The most common benefit of transparency is the reduction of asymmetric information, and therefore lowers the cost of trading the firm’s securities and the firm’s cost of assets. To counteract this benefit, reviewers typically spotlight the direct costs of disclosure, as well as the competitive costs arising because the disclosure provides potentially useful information to product-market rivals.
The main concern is the affiliation between the chief executive officer (CEO) and the firm’s owners (alternatively, between the CEO and the directors acting on behalf of the owners). “Nowhere has this been more true than in the case of Enron. The evidence suggests that Enron’s board and audit committee were aware of numerous red flags, including concerns about Enron’s accounting policies; yet they
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McBride must develop an understanding of transparency in corporate governance and ensure this format is used within the corporate governance framework. Hugh has to analyze the result that disclosure has on the contractual and scrutinizing involvement between the board and his role as chief executive officer. The impact of transparency on corporate governance creates a higher quality disclosure both offers benefits and compels costs. The advantages echo the fact that more precise information about presentation allows boards to make improved
personnel decisions about their executives. The board of directors for McBride would be required to focus on the best interest of the company and stakeholders with the insurance that everything is performed within the law. Directors have to be made aware of what the courts require as their basic fiduciary responsibility, including care and how to get the protection of the business judgment rule, for the purpose of protecting the directors.
“Basically, if a board acts in good faith on an information basis and in a manner they reasonably believe to be in the best interests of shareholders when they do not act in a self interest, the courts will not second-guess their decisions” (McCoy, Martin, & Diamond, 2010, p. 1). A board of this nature would evaluate the suggestions of punishment that has the potential to affect the motives of the CEO to misrepresent the information coming from their firm. Hugh has to suffer some form of punishment if wrong doings are used from the start of the company.
The board should ensure that punishment embellishing effort can be successful when severe enough to stop this effort; however, relatively slight penalties can be counterproductive. Transparency with in the McBride Financial Services governance will create a customary where everyone concerned can contribute on any given project and obtain a greater level of proficiency. Transparency can also support in bringing everyone onto the same level within the process and details of the project and includes buy-in to the governance.
“Elements of transparency help foster any change process an organization may endure. This is especially true when change needs to occur to bring a company into compliance with any regulator constraints, such as Sarbanes-Oxley (SOX), Act” (Goessl, 2010, p. 1). McBride should start the company by complying with the regulatory requirements implemented by the government to ensure both the security of the company and shareholders. The board is responsible for the governance, but usually the CEO would be accountable for the corporate governance plan, accomplishment and presentation.
“Ultimately, more transparency of the governance processes, the more confidence in the governance and the less transparent the governance processes are, the less people follow them, so it is imperative to that these processes are known throughout the company and especially governed by the board of directors” (Goessl, 2010, p. 2). Self-interest of management limits the use of compliance and transparency through unethical decision-making performances. Effective corporate governance uses transparency to lower the self-interests of management.
Many different instances that self-interest choices are made by managers and directors influence the organization, but management’s defensiveness of their own self-interest is a widespread practice in today’s society. This practice is governed by independent oversight committee. “An Audit Committee (or equivalent body) established by and amongst the board of directors of an issuer for the purpose of overseeing the accounting and financial reporting processes of the issuer; and audits of the financial statements of the issuer” (McCarthy & Flynn, 2004, p.
178). In the scenario, Hugh’s choice was to control every aspect of the company and showed no interest in the policies when the selection of a board of directors was done. Hugh made choices for the organization where self-serving began with the selection of who he wanted as the board of directors. Hugh writes, “Please see the attached note from Doug Masters at Beltway. I want to give it its due attention but do not plan on allowing the money men to dictate how I’ll run this company. Please proceed with invitations for those listed as my choice for directors.
Since Beltway will need to approve these selections, I’ll need a “flowery” biography for each selling them on approval” (UPO, 2012, p. 2). McBride should not be allowed to select the board of directors because his choice is individuals he can control. Hugh’s self-interests will no longer be permitted and his only choice is to accept the board of directors as an independent committee. Hugh’s choices reveal his desire to compromise the corporate governance committee’s influence and company ethical standards. MFS should make the company’s vision that of integrity and truthfulness, which should be mirrored in the CEO.
“Most financial economists that acquisitions play a key role in the overall corporate governance system of monitoring managerial performance and thereby improving corporate efficiency” (Chew & Gillan, 2005, p. 393). Hugh will take this opportunity to lead the team on advances that assimilate values and ethical decision making processes within the corporate culture. Obtaining the correct goal can be accomplished by getting the possible risks that would develop from combining alternative resolutions and mitigating risk. One area of concern would be outside auditing controls and the development of procedures to include compliance.
MFSI does not comply with the laws and regulations of the SOX act because they do not have a transparent accounting and financial process. “In the United States, the Security Exchange Commission (SEC), under the oversight of the United States Congress, is responsible for maintaining and regulating the required accounting and disclosure rules that firms must follow” (Bushman & Smith, 2003, p. 2). Hugh needs to take courses that would give him knowledge of internal controls, accounting, and financial reporting, which would guarantee compliance to SOX and the SEC regulations.
“Stakeholder theory, says that corporations should attempt to maximize not the value of their shares, but rather the total value that is distributed among all corporate, including employees, customers, suppliers, local communities, and tax collectors” (Chew & Gillan, 2005, p. 3). Corporate self regulation instead of self-interests are successful in corporate governance if transparency is used to lessen the self-interests of management to shun law suits and penalties by the SEC.
The risk of compliance issues are reduced with transparency. “Since transparency concerns external communication to the investment community, similar considerations must go into the question of whether to provide guidance to analysts” (McCarthy & Flynn, 2004, p. 107). Conclusion MFSI should implement policies that make the organization liable especially for unfair treatment to the shareholders. Hugh had the idea of controlling the entire organization because of his self-serving ideas.
Fortunately, the SOX Act and the SEC regulations does not allow CEO’s from publicly traded organizations to ensure they have complete corporate control. MFSI by law must show transparency in internal controls and corporate governance policies because this would be a conflict of interest. Transparency requires SOX to have checks and balances, which involves an independent board of directors. Transparency is the responsibility of an entire organization, this requires ethical values, honesty, accountability, and responsibility.
MFSI can accomplish their goal by creating a corporate culture that sets the values of the company mission statement. References Bushman, R. M. & Smith, A. J. (2003). Transparency, Financial Accounting Information, and Corporate Governance. Retrieved May 6, 2012, from http://www. ny. frb. org/research/epr/03v09n1/0304bush. pdf Chew, D. H. , & Gillian, S. L. (2005). Corporate governance at the crossroads: A Book of readings. Boston, MA: McGraw-Hill. Goessl, L. (2010). How Transparency Helps Make IT Governance More effective.
Retrieved May 3, 2012, from http://www. helium. com/items/1614755-how-transparency-helps-make-it-governance-more-effective McCarthy, M. P. , Flynn, T. P. , & Brownstein, R. (2004). Risk from the CEO and board perspective. New York: McGraw-Hill. McCoy, T. , Martin, K. , & Diamond, S. F. (2010). Corporate Governance. Retrieved May 4, 2012, from http://www. scu. edu/ethics/practicing/focusareas/business/conference/presentations/corporate-governance-panel. html University of Phoenix, (2012). McBride Scenario. Retrieved May 7, 2012